Capital Gains Tax: Dealing with the abolition of taper relief

The aboliton of taper relief will be hard to swallow and uncertainty over taxes is unsettling. In a fluctuating climate , we round-up the situation for you

by Jon Card

Updated: Nov 25, 2013 Published: Dec 14, 2007

The aboliton of taper relief will be hard to swallow and uncertainty over taxes is unsettling. In a fluctuating climate, we round-up the situation for you.

Tax planning isn’t a subject that is likely to enthrall many of you, but the money you can save can be very exciting. If you’re intending to exit the earlier you begin discussions with your accountant the better. He’s likely to be a lot more sympathetic to your needs than the taxman!

Taper Relief

As many of you rush to beat the April deadline, it won’t come as great news to hear that the date on the contract is still the most important thing. Contracts signed after then cannot take advantage of taper relief on capital gains tax (CGT), whereas those signed before can. Meanwhile, those of you who have already got deals in place but with earn-outs extending into the period after April 5 should still only be paying 10%. So, the exact time of the payment is not a significant point when you sign the paperwork. But you might want to have another look at your existing arrangements to ensure they are still as tax efficient as they initially were.

Earn-outs

David Killshaw, a tax partner at KPMG, says entrepreneurs often get caught out by classing money as a capital gain when the taxman views it as income. “Does the money come to you in return for your shares or because you’re working for the company?” asks Killshaw. It’s a very valid question and is the difference between paying a 40% tax rate instead of 10% or 18%. Therefore there’s still an incentive to get the lion’s share of the money upfront and ensure your earn-out agreement is worded carefully.

Key Players

You’re probably not the only person exiting the business and may want to remunerate close colleagues and key players in your team. However, be careful what you promise and consider their tax situation as well as yours. The best way to repay people is at the time of the sale and not to wait until after the deal has been completed. As Killshaw says: “A promise to an employee comes with a 40% tax rate if it is fulfilled after the deal as it will be classed as income.”

Moving abroad

Some entrepreneurs consider moving abroad to take advantage of tax breaks but this is a long-term solution. You need to be out of the UK for at least five years in order to avoid CGT so a few months between now and April won’t work. The tax regime in your country of choice is, of course, crucial. Old favourites such the Channel Islands, Monaco or Switzerland are tax havens, and is Dubai which is now attracting many firms.